Naphtha Supply Chain: Understanding the Buying Process and Key Requirements

Naphtha plays a critical role in the global energy and chemical industries. It serves as a feedstock for petrochemical production and as a fuel component. For companies looking to secure a steady supply of naphtha, understanding the buying process and the key requirements involved is essential. This post breaks down the steps involved in purchasing naphtha in large quantities, highlights important contractual and financial procedures, and explains how buyers and sellers collaborate to ensure smooth transactions.

Industrial storage tanks for naphtha supply

Overview of Naphtha Supply and Pricing

Naphtha supply contracts typically involve large volumes, ranging from 50,000 to 500,000 metric tons per month. Pricing is often quoted on a CIF (Cost, Insurance, and Freight) basis, which includes delivery to the buyer’s port. For example, a common price point might be $360 gross per metric ton, with a net price of $350 per metric ton after discounts.

A commission fee of $10 per metric ton is usually shared equally between the seller and buyer, with each receiving $5 per metric ton. This commission structure incentivizes brokers or intermediaries involved in facilitating the transaction.

Step 1: Buyer Issues ICPO and Company Registration

The first step in the buying process is for the buyer to issue an Irrevocable Corporate Purchase Order (ICPO). This document confirms the buyer’s intent to purchase the specified quantity of naphtha. Along with the ICPO, the buyer must provide a copy of their company registration certificate. This verifies the buyer’s legitimacy and legal standing.

Providing these documents upfront helps establish trust and sets the foundation for the formal sales agreement.

Step 2: Sale and Purchase Agreement (SPA) Negotiation

Once the seller receives the ICPO and registration documents, they draft a Sale and Purchase Agreement (SPA). The buyer reviews this SPA carefully and may request amendments if necessary. The buyer then signs the SPA and returns it in Word format within seven banking days.

Along with the signed SPA, the buyer submits a Client Information Sheet (CIS). This sheet includes details about the bank that will issue the financial instrument (such as SBLC or DLC) and the issuer’s CIS if different from the buyer’s company.

After reviewing the buyer’s documents, the seller sends the final approved SPA in PDF format along with a Proforma Invoice. This invoice is necessary for the buyer to issue a financial instrument pre-advice or a Ready, Willing, and Able (RWA) letter to the seller’s fiduciary bank.

Step 3: Issuance of Financial Instrument Pre-Advice or RWA

The buyer must send a swift copy of their issued Standby Letter of Credit (SBLC) MT760 or Documentary Letter of Credit (DLC) MT700 pre-advice, or alternatively, a Ready, Willing, and Able (RWA) MT999/199/799 message to the seller’s fiduciary bank. This step confirms the buyer’s financial readiness to proceed with the transaction.

Upon confirmation, the seller provides partial proof of product (POP) documents via email. These include:

• Unconditional Commitment to Supply

• Certificate of Analysis (COA), also known as the Product Passport

• Statement of Product Availability

• Commercial Invoice for the first shipment’s total product value

  
  

These documents assure the buyer that the product is available and meets quality standards.

Step 4: Issuance of Fully Funded SBLC or DLC and Shipment

Within seven banking days of receiving the partial POP, the buyer’s bank issues a fully funded SBLC MT760 or DLC MT700 to the seller’s fiduciary bank. The buyer sends swift copies of this financial instrument to the seller to enable the commencement of product loading.

The seller’s bank then issues a 2% Performance Bond (PB) to the buyer’s bank. This bond activates the buyer’s financial instrument and confirms the seller’s commitment to deliver the product.

Once the financial instruments are in place, the seller coordinates with the shipping company to load and dispatch the naphtha shipment.

Important Notes on Financial Instruments and Contingencies

If the buyer cannot issue the SBLC MT760, DLC MT700 pre-advice, or RWA in the second step, they must notify the seller immediately. This communication allows both parties to discuss alternative arrangements or resolve issues before proceeding.

Financial instruments like SBLC and DLC are critical in international commodity trading. They provide security to both buyer and seller by guaranteeing payment and delivery under agreed terms.

Practical Tips for Buyers in Naphtha Transactions

• Prepare all company registration and banking documents in advance to avoid delays during the SPA negotiation phase.

• Review the SPA carefully and consult legal or trade finance experts to ensure terms are clear and favorable.

• Maintain open communication with the seller’s fiduciary bank to confirm receipt and acceptance of financial instruments.

• Understand the timeline requirements such as the seven banking days for SPA return and financial instrument issuance to keep the process on track.

• Request detailed product documentation including COA and Statement of Product Availability to verify product quality and availability before payment.

  
  

Conclusion